L6 Taxation of Partnerships & National Insurance Contributions

Question 1

when does a partnership exist

Answer 1

exist where two or more individuals work together in business with the aim of making a profit

Question 2

how is a partnership taxable?

Answer 2

the profits are allocated between the partners and each partner is responsible for tax due on his or her share

Question 3

Partnerships calculated the same way as sole traders, but whats the only difference?

Answer 3

The only additional step is to split the profits according to the partnership agreement – remember each partner is assessed just on his or her share of the taxable trading profits for the tax year

Question 4

how are profits split between partners?

Answer 4

through the profit sharing agreement.

usually there is a profit sharing ratio between the partners.

Question 5

what are the methods of partners splitting profits?

Answer 5

1. to allocate set ‘salaries’ then share any remaining profits in a set ratio. These salaries are simply allocations of profit and should not be confused with any salaries paid to employees of the partnership.
2. the partners to take a percentage on their capital invested in the partnership as part of their share of the profits.

Question 6

what do you do if the questions said they took drawing and give you a percentage on it?

Answer 6

you less the interest on drawings from what they are owed. i.e. what they will receive in income/salary.

Question 7

what can the allocation of profits or losses using “salaries”, “interest on capital” and PSR etc. lead too? and what does this mean?

Answer 7

anomalous circumstances. For example it is possible for a partnership to make a profit but one or more partners to be allocated a loss

Question 8

what is a notional loss?

Answer 8

when a partnership to make a profit but one or more partners to be allocated a loss

note you can also get a notional profit!

Question 9

what happens when there is a notional loss?

Answer 9

loss must be must be reallocated to the other partners in the same proportion as their profit allocation

Question 10

what is a notional profit?

Answer 10

partnership overall to make a loss but one or more partner to be allocated a profit

Question 11

what happens when there is a notional profit?

Answer 11

must be reallocated to the other partners in the same proportion as their loss allocation

Question 12

formula for reallocating a loss?

Answer 12

(x’s profit for period/(x’s profit for period + y’sprofit for the period) x loss amount recog’d by partners)

assuming x and y are the only partners to make a positive profit. If more add to x and y’s figures and divide x’s profit by the total positive profits made.

Question 13

if partners have made a loss and only one has made a profit, how much do you reallocate?

Answer 13

reallocate the partners with a losses loss evenly to the partner that made a profit. you reduce the profit as far as NIL. you cannot make this partner incur a loss.

Question 14

what happens if the partnership agreement changes during the year?

Answer 14

the profit share needs to be calculated on a time apportioned basis for each of the arrangements. Any salaries or interest on capital need to be time apportioned also.

split the accounting period in to two parts and then work out the allocation!

Question 15

what happens when a new partner joins the partnerships?

Answer 15

the opening year rules apply to that partner, whilst the other partners are assessed on the current year basis as usual. In this situation you could have different basis periods for different partners so it is important to allocate the profits to each partner BEFORE working out the basis of assessment.

time apportion too if necessary!

Question 16

steps to follow when working out partnership profits to include in an individuals income tax computation are?

Answer 16

a) Adjust partnership trading profits (for disallowable expenses including depreciation, income not included in the accounts, expenses not included in the accounts etc)
b) Calculate and deduct capital allowances to determine the tax adjusted trading profits of the partnership
c) Allocate the tax-adjusted profits between the partners
d) Determine the basis period for EACH PARTNER (not necessarily the same for all partners) and transfer the assessable profits for each partner into their income tax computations

REMEMBER A,B, and D are the same steps as a sole trader!!!

Question 17

what happens if a partner leaves a partnership during an accounting period?

Answer 17

then this will lead to a change in the partnership profit sharing arrangements (PSA)

Question 18

how do you deal with a change in the PSA when a partner leaves for e.g. ?

Answer 18

deal with this by breaking the accounting period down into parts, just the same as for a new partner joining the partnership or a change in profit sharing arrangements between existing partners.

Question 19

what happens if a partner has b/f overlap profits?

Answer 19

less overlap profits at the end to get the assessable profits for the period.

Question 20

partners are entitled to loss relief. how does this work?

Answer 20

the same way as sole traders. Each partner claims loss relief as most appropriate for his individual circumstances.

Question 21

what are paid on employment and self employment income?

Answer 21

national insurance contribution (NIC)

Question 22

who are exempt from NIC?

Answer 22

No NIC are due on pensions; indeed any individual in employment or self-employed over state pension age is EXEMPT from Class 1 primary and Class 4 NIC. Persons under 16 are also exempt. Tips, expenses allowances and mileage allowances from the employer do not attract NIC

Question 23

what are class 1 NIC paid on

Answer 23

EMPLOYMENT INCOME

Question 24

what are the types of class 1 NIC

Answer 24

primary and secondary

Question 25

what are primary class 1 NIC?

Answer 25

Primary Class 1 NIC are paid by the employee, calculated on ‘earnings’ in the ‘contribution period’ i.e. salary, commission, bonuses etc., and deducted from the employees pay through the PAYE system

Question 26

what do . Employees not pay Primary Class1 NIC on

Answer 26

1. benefits in kind that are not convertible to cash
2. employment related items that are exempt from income tax such as car parking, bicycle loan etc.
3. employer’s contributions to the employer’s pension scheme
4. tips from customers
5. expenses reimbursed by the employer (including mileage at or under the approved rates)

Question 27

what is the rate of primary class 1 NIC?

Answer 27

12% on earnings above the ‘primary threshold’ (‘PT’) but below the Upper Earnings Limit (‘UEL’)

Once earnings exceed the UEL, the employee pays Class 1 primary contributions at 2%

Question 28

how are primary class 1 NIC calculated?

Answer 28

not on a cumulative basis like income tax. it is calculated by each week or month on a standalone basis.

Calculate the amount above the primary threshold up to the point you reach the UEL. then calculate the amount above the UEL.

Question 29

what happens to primary class 1 NIC if a person has more than one employment?

exception?

Answer 29

each is treated separately for Class I NIC purposes.

So an individual may have two (or more) part time jobs, each below the PT, and pay no Class 1 primary NIC.

HOWEVER, if two jobs paid at 12% (so above Primary threshold and below UEL) and these both add up to more than UEL, refunds will be given.

Question 30

what is the rate of secondary class 1 NIC?

Answer 30

The employer pays Class 1 secondary NIC on employee’s earnings above the secondary threshold (ST) at 13.8%.

There is no reduction in the contribution rate after the UEL has been passed

Question 31

Directors are arguably in a position where they could arrange for their salaries to be paid in a small number of lump sums. why would they want to do this?

Answer 31

to reduce the primary Class 1 NICs payable

Question 32

how do you avoid directors arranging for their salaries to be paid in a small number of lump sums to reduce the primary class 1 NICs payable?

Answer 32

director’s contributions are calculated on an annual (cumulative) basis. The whole year is treated as a single contribution period.

Question 33

what is the NIC employment allowance for class 1 secondary NIC?

Answer 33

most employers are allowed to offset an employment allowance of £3,000 against their Class 1 Secondary national insurance liability provided the employer is not a company with only one director and no other employee

Question 34

what are class 1A NIC paid on?

Answer 34

Employers pay these directly on their employee’s expenses or benefits

(benefits in kind - benefits which employees or directors receive from their employment but which are not included in their salary cheque or wages)

Question 35

what are class 2 NIC paid on?

Answer 35

Class 2 NIC are paid by all self-employed individuals between their 16th birthday and normal retirement age

Question 36

what is the rate of class 2 NIC?

Answer 36

Class 2 are at a flat rate of £2.95 per week; no contributions are due below the small profits threshold of £6,205 for 2018-19.

This £6,205 limit is the NET PROFITS PER THE ACCOUNTS FOR THE TAX YEAR, not tax adjusted trading profits

Question 37

what are class 3 NIC paid on?

Answer 37

Voluntary contributions - you can pay them to fill or avoid gaps in your National Insurance record.

Question 38

what is the rate of class 3 NIC?

Answer 38

Class 3 contributions are a flat rate of £14.65 per week for 2018-19.

Question 39

what are class 4 NIC paid on?

Answer 39

Self-employed people earning profits over £8,632 a year.

After deducting capital allowances!

Question 40

what is the rate of class 4 NIC?

Answer 40

The rate is 9% for profits over the lower profits limit (£8,424) and up to the upper profits limit (£46,350) and 2% thereafter.

Question 41

when are class 2 and class 4 NIC paid?

Answer 41

Class 4 NIC and Class 2 NIC are paid after the end of the tax year, along with the income tax due for the year.

Question 42

what is paid if an individuals are both employed and self-employed

Answer 42

both Class 1 and Class 4 NIC must be paid

Question 43

what can it result in if both class 1 and 4 NIC are paid?

Answer 43

This can result in overpayment, and refunds are given of the Class 4 NIC paid